One of the major advantages of an LLC is the fact that in case of crisis, the business could continue through a transfer of membership. So yes, it’s possible to transfer ownership of a limited liability company but the process will largely depend on the provisions in the LLC’s operating agreement.

The truth is that the process of transferring ownership of an LLC is often an extensive topic in the company’s operating agreement. The rules and clauses are often clearly stated there and even though an operating agreement is not required by the law, each member probably signed it when the LLC was being formed.

The process of transferring ownership also varies depending on the situation. Is the entire company being sold or are the owner’s name and ownership percentages changing? All these should be stipulated in one of the documents in the operating agreement known as a Buy-Sell agreement. Indeed, a buy-sell agreement is more like a document that states clear instructions on how to buy out a member of a limited liability company. The buy-sell agreement gives clear answers on whether the business must buy back shares from departing members, how the remaining shares will be distributed, the process for approving the transfer as well as how interests will be valued in the case of transfer of interest. The limited liability company is obliged to respect everything that is stated in the operating agreement to avoid a lawsuit by a departing member of the LLC.

There are generally two scenarios when it comes to ownership transfer;

  1.     Buying out an LLC member

For an LLC to buy out a member’s share and subsequently transfer his ownership, it needs to first and foremost value the entire business including the shares of members to determine how much the departing member is worth in terms of shares. When this happens, the LLC can proceed to buy out the departing member’s shares as long as the decision is approved by all the remaining LLC members. If the LLC failed to specify anything concerning the change of ownership in its operating agreement, then it must turn to the laws of the state where the business was officially registered.

  1.     Selling an LLC

The operating agreement typically has rules concerning the valuation of a business before buying out a member but doesn’t require a particular process to value an LLC before selling it. This only means that the LLC is responsible for finding a buyer who agrees to buy at its price. Once the terms of sale have been agreed upon, the LLC can now memorialize the terms in a preliminary memorandum or change of ownership letter. Both parties will therefore move forward with a formal transfer of business ownership agreement which should be executed like any other type of contract according to the state’s laws.

Transferring ownership of an LLC can easily result in consequences for the overall business so it’s imperative for the LLC to lay down the best practices in its operating agreement when the LLC is being created.

 

Categories: Business